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Stefan Schmitt

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Economy is a three-player game
Financial Markets do not equal "The Market"

One of the most eye-opening concepts for me recently was one from Bill Janeway's forthcoming book Doing Capitalism. Most of us naively accept the formulation that the economy is a two-player game, made up of "the free market" and government, which keeps it in check. Bill makes an incredibly important distinction between the market consisting of the real exchange of goods and services, and financial capital, which, like the state, sometimes benefits the market, and sometimes damages it. It's not a two-player game, it's a three-player game, as the current financial crisis has demonstrated.

Read this +Paul Krugman op-ed with this framework in mind, and it will be much more compelling even to those who normally will be tempted to think of financial capital and "the market" as one and the same.

Here is the bit worth pondering, while trying in your mind to separate financial capital from the real market economy:

"...we’ve been hearing a lot from Wall Street and its reliable defenders — a tale in which the incredible damage runaway finance inflicted on the U.S. economy gets flushed down the memory hole, and financiers instead become the heroes who saved America.

"Once upon a time, this fairy tale tells us, America was a land of lazy managers and slacker workers. Productivity languished, and American industry was fading away in the face of foreign competition.

"Then square-jawed, tough-minded buyout kings like Mitt Romney and the fictional Gordon Gekko came to the rescue, imposing financial and work discipline. Sure, some people didn’t like it, and, sure, they made a lot of money for themselves along the way. But the result was a great economic revival, whose benefits trickled down to everyone.

"You can see why Wall Street likes this story. But none of it — except the bit about the Gekkos and the Romneys making lots of money — is true.

"For the alleged productivity surge never actually happened. In fact, overall business productivity in America grew faster in the postwar generation, an era in which banks were tightly regulated and private equity barely existed, than it has since our political system decided that greed was good.

"What about international competition? We now think of America as a nation doomed to perpetual trade deficits, but it was not always thus. From the 1950s through the 1970s, we generally had more or less balanced trade, exporting about as much as we imported. The big trade deficits only started in the Reagan years, that is, during the era of runaway finance.

"And what about that trickle-down? It never took place. There have been significant productivity gains these past three decades, although not on the scale that Wall Street’s self-serving legend would have you believe. However, only a small part of those gains got passed on to American workers.

"So, no, financial wheeling and dealing did not do wonders for the American economy, and there are real questions about why, exactly, the wheeler-dealers have made so much money while generating such dubious results."
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